JAKKS Pacific, Inc.

Good afternoon, everyone. Welcome to the Jax Pacific second quarter 2024 earnings conference call with management, who will review the financial results for the first quarter ended June 30th, 2024. Jax issued its earnings press release earlier today. The earnings release and presentation slides for today's call are available on the company's website in the investor section. On the call this afternoon are Stephen Berman, Chairman and Chief Executive Officer, and John Kimball, Chief Financial Officer. Stephen will first provide an overview of the quarter along with highlights of product lines and current business trends, Then John will provide some additional editorial around Jax Pacific's financial and operational results. Mr. Romer will then return with additional comments and some closing remarks prior to opening up the call for questions. Your lines will be placed on mute for the first portion of the call. If you would like to be placed in the queue to ask a question, please press star 11 on your telephone. Before we begin, the company would like to point out that any comments made about Jax Pacific's future performance events or circumstances, including estimates of sales, margins, and or adjusted EBITDA in 2024, as well as any other forward-looking statements concerning 2024 and beyond are subject to safe harbor protections under the federal securities laws. These statements reflect the company's best judgment based on current market trends and conditions today and are subject to certain risk and uncertainties which could cause actual results to differ materially from those projected in the forward-looking statements. For details concerning these and other such risk and uncertainties, you should consult Jack's most recent 10K and 10Q filings with the SEC, as well as the company's other reports subsequently filed with the SEC from time to time. In addition, today's comments by management will refer to non-GAAP financial measures, such as adjusted EBITDA and adjusted earnings per share. Unless stated otherwise, the most directly comparable GAAP financial metric has been reconciled to the associated non-GAAP financial measure within the company's earnings press release issued today or previously. As a reminder, this conference is being recorded. With that, I'd like to turn the call over to Mr. Steven Berman.

Good afternoon, and thank you for joining our call today. We are happy to share our current results after another constructive quarter. We continue to proactively engage retailers and licensors about new ideas to grow our mutual businesses, and we continue to work internally revisiting and refining the way we do business to ensure we are maximizing margins and sales as the increasing complexity of our global business merits. I feel confident that we are doing all the correct things today and looking toward the future that will both help us achieve our plans for this year, as well as we generate long-term value as we look ahead to 2025 and even 2026. Our business performed in line with our expectations for the quarter, and although consumer outlook remains a bit unpredictable, we are increasingly confident we will achieve our objectives for the year. As I touch upon later in the call, we have a number of exciting initiatives launching this fall. As we look at the second half of 2024, this gives us confidence that 2025 has a lot of potentially positive narratives in its earliest stages. As such, we are diligently planning for that and seeding new opportunities. Our total business generated $148.6 million in the second quarter, down 11% from this time last year. That sales level is significantly higher than the $112.4 million we shipped in second quarter of 2021, which is the last year we had a similar content light first half. So although our sales are down, we are not concerned that it's somehow a negative reflection on the health of our core and evergreen businesses. The doll and role-play division delivered $63.6 million in net sales, up 6.6% from $59.7 million, despite comparing against the Disney Little Mermaid release timing last year. The action play and collectible business generated $36.6 million, down 30.5% from $52.6 million last year, which was a very difficult comparison with the Super Mario Bros. movie. Our outdoor and seasonal business continued light, delivering $4.4 million versus $5.7 million last year, but we are starting to see some bright spots with new listings and solid sell-throughs at relevant accounts. Our disguise costume business generated $44 million in net sales, down from $49 million last year. As we said on the last call, we expect this business to be slightly softer than last year globally. Retailers are still trying to calibrate their order levels on a full year basis post-COVID. With 51.2 million sold year-to-date, we are still tracking significantly higher than 2021 when our year-to-date number was 34.8 million. Reviewing the business from a market perspective, our North American business has led the way, shipping 132.1 million in the quarter at a decline of 7.6%. International has been more of a drag. Although also impacted by content comp, some logistic issues in Asia resulted in some sales slipping out of the quarter. As a result, we saw international drop to 16.5 million in the quarter, down 31.1% versus prior year. Our toy and consumer products POS comparisons are ever-changing, given the impact of content-driven product last year and this year. Putting those titles aside, Some of our product lines outperformed last year, and some are a bit softer. Overall, we would say our business was tracking down a low single digits percentage at retail. Consistent with what you've heard from other sources, we agree that there hasn't been a tremendous amount of excitement in the space for the first half of the year, and in-store results have tracked similarly. We're not seeing any trends in this area, however, that give us any reason for any concern as we move into the second half and the majority of the new product introductions queue up for the launch during the second half of this year. On a final note, before I pass it over to John, we were excited to learn this month that we were named the 2023 Hard Goods Vendor of the Year by Target. As you know, we have a great longstanding relationship with Target who support a broad and deep assortment of product lines. We are extremely proud to receive this recognition that stretches beyond the tour aisle to the entire hard goods sector at Target. Congratulations to our team and particularly the people we have based in Minneapolis who partner with Target daily to maximize our business together. Now over to John for some comments. And after, I will come back and talk more about where we are focusing in the second half and beyond. John.

Thank you, Stephen. And hi, everybody. Q2 was a pleasantly uneventful quarter when it comes to talking about results, even if there's been a lot of activity happening behind the scenes. Stephen said, top and bottom line results were in line with our expectations, and we seem to be on track for another very productive year. We have a wide range of new product introductions coming to market over the next six months, and we're excited for consumers to engage with them. As we've covered sales extensively, I'll move into margin. Gross margin was up 130 basis points in the quarter, primarily due to lower royalty expense. The reduction is essentially driven by the mix of products sold in the quarter, the contributions of the various IP, and then also some impact of selling method. With gross margin at 32.0%, that's as good of a Q2 we've posted since 2012. It's challenging to improve margins when sales are down, so we're happy with that result. Moving down the P&L, there's not a lot of updated news from last quarter. Lower sales do not help scale fixed costs. and we are investing against the back half of the year and 2025 a bit more than we were at this time last year. We would like to see our first half level of margin erosion decrease in the latter half of the year, but we will also not try to optimize against a specific metric if we think an expenditure is the right thing to do. As we have said before, we plan the business considering full-year revenues and related full-year expenditures as opposed to trying to optimize for a quarterly outcome. While also managing the current year's transactions, and deploying resources to enable business in the two subsequent calendar years. Seasonality is a fact for us, which is why we value resilience and predictability of results and avoid trying to over-obsess about the short term. With all those protestations aside, Q2 operating margin of 5.1% and adjusted EBITDA margin of 8.3% are still strong results for us. We continue to increase our internal communications around sales expectations and inventory management to improve productivity in that area. Our Q2 total inventory level of $51 million is the lowest it has been at this time of the year since 2010. Customers continue to embrace the direct import FOB business model, which among other positive attributes is working capital friendly to us. Timing of sales and pace of collections leaves us exiting the quarter with a bit more accounts receivable and a bit less cash than usual, but this is in line with our internal planning. We have drawn $5 million on our ABL as of quarter close, a number that we have increased to $26 million as of this week, but we anticipate that balance to be mostly, if not entirely, repaid by the end of Q3 as collections accelerate. This seems like an ideal place to point out that year-over-year, our interest expense at the total company level is $399,000 year-to-date versus $4.3 million in the first half of 2023. To wrap, adjusted EBITDA for the quarter was $12.3 million, or 8.3% of net sales, bringing our 12-month trailing number to $51.2 million, or 7.6% of net sales, Adjusted EPS was $0.65 per diluted share, down from $1.26 last year. And now, back to Stephen.